Invalidity of Income Tax Act notice during appeal; principle of merger applied.

The Court held that the notice issued under Section 263 of the Income Tax Act during the pendency of appeals before the Tribunal was invalid as the principle of merger applied, and no opportunity was given before its issuance. The Court distinguished previous decisions cited by the revenue and allowed the petition, quashing the notice without costs.

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Issues:
Challenge to notice under Section 263 of the Income Tax Act, 1961 during pending appeal before Tribunal.

Analysis:
The petitioner filed its return of income for A.Y. 1999-2000, which was processed, and a revised return was filed. Subsequently, a final assessment order was passed, partly allowing the appeal before CIT(A). Both petitioner and revenue approached the Tribunal with appeals. During the pendency of these appeals, the revenue issued a notice under Section 263 of the Act on 11.11.2005, leading to the present petition.

The petitioner contended that the notice under Section 263 during the appeal before the Tribunal was improper. The petitioner argued that once the order of the AO merged with the order of CIT(A), the revenue could not issue the notice under Section 263. This argument was supported by a precedent where it was held that the power of revision does not extend to matters decided by the appellate authority.

On the other hand, the respondent-revenue argued that the principle of merger did not apply in this case. The respondent relied on various decisions to support this stance.

The Court examined the provisions of Section 263(1) of the Act, emphasizing that the Commissioner can pass an order enhancing or modifying the assessment after affording the assessee an opportunity to be heard or conducting necessary inquiries. In this case, the final assessment order had been passed after modifications, and both petitioner and revenue had filed appeals covering various grounds, including deductions under Sections 80HHC and 80IA of the Act.

The Court held that the principle of merger applied in this case as the order of the AO merged with the order of CIT(A). Therefore, the notice under Section 263 issued to the assessee was invalid, especially since no opportunity was given before its issuance. The Court distinguished the decisions relied upon by the respondent and allowed the petition, quashing the notice issued by the revenue.

In conclusion, the Court allowed the petition, quashed the notice issued under Section 263, and made the rule absolute with no order as to costs.

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